Crypto winter is upon us, hitting both institutional and retail investors.
In a Barron’s Live webinar on July 21, Financial News spoke with Charles Allen, chief executive of blockchain infrastructure firm BTCS, to discuss the lasting consequences of the crash, the role of regulators and what’s next for digital assets.
This excerpt has been edited for clarity and brevity.
What do you think about crypto cracking?
It’s not just the crypto market. The whole economy, in general, is shaky. The backdrop of other issues is huge.
When you look at crypto, it all started with dirt and the stablecoin algorithmic crack. This set certain events in motion. On the positive side, we have seen an increase in crypto prices over the past few days. It really creates opportunities, if you understand and are willing to take the time to learn the technology and what it can do.
The most important thing you can do is step back and look at the last eight or ten years. Look at where crypto was then and where it is now; this is just a touch.
Regulators are starting to monitor the crypto market more closely. How do you think it will play out?
It’s a really positive thing for the sector. I got into crypto in 2013. It was very different then. Goldman Sachs wasn’t looking at crypto and institutions weren’t looking at it.
When companies started using crypto or operating like a bank, or the initial coin offering fad in 2017, these things were effectively securities for the most part. Regulators have been sitting on the sidelines.
It is very important to have a good policy. If it is securities, you want the formation of capital and orderly markets. Investor protection goes beyond capital formation.
In this case, we don’t want to get in the way of technology; we want blockchain technologies to grow, prosper and be a cornerstone of economic growth. To do this, a rational regulation makes a lot of sense. You have to remove the bad actors.
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Hopefully the regulators get it right. It might be a bit of a knee-jerk reaction. It always happens like that, and then a setback, but I think it’s positive.
It can’t just be left to the regulators to get everything right. What does the industry itself need to do to regain confidence in digital assets?
One thing you’ll likely see is that many retail investors and people who hold crypto are starting to look a little more seriously at who they’re doing business with. They’ll probably start trying to keep their own private keys, if you’ve heard that expression: “not your keys, not your money.”
You don’t necessarily need the protections of the Federal Deposit Insurance Corporation with crypto. Just take your money and insure it yourself. If you have your own money, you don’t have to worry about a bank failure. What is this institution that I have my money with? What are they doing? How do I get these returns?
I think people are going to start getting a little smarter.
But, on the other hand, people have a very short memory. If crypto starts to rise again, people will forget, to some extent, why some of these things happened. Hopefully they will take the lessons learned and start managing and monitoring their own money in a more productive way.
Do you think they will have scars from the accident? Will crypto people turn off?
It depends on the individual. If someone has lost a lot of money, it will be hard to swallow. One of the things that I find very interesting, when you look at the stock market or even the crypto market, is that there is a great fear of missing out.
People always tend to buy at the top. They have fully invested in the top and not the bottom. This has happened in the stock market, this is happening in the crypto market. It’s a very peculiar human behavior, where everything else in life is traded, but it doesn’t usually happen so much when you’re trying to get the best deal in the stock market, unless you’re a professional investor.
Hopefully he doesn’t lose confidence. The interesting thing is that blockchains haven’t really failed. Bitcoin blockchain has never been hacked, Ethereum remains strong. Most of these blockchains have never had a problem. If you look at Celsius, he paid off his endless loans before filing for bankruptcy.
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If you are an outsider learning about this space, it is a very interesting time to see how robust the technology is.
Before the crash there was a major push to legitimize crypto with the inclusion of institutional investors. What impact have they had and what impact will they have, if and when crypto recovers?
It’s really shocking that institutions have gotten into crypto. It changes the dynamic a little bit: the dollar flows, the quantity of money has increased, it has pushed the price up.
Institutions also operate with a risk-on and risk-off approach. Crypto is almost trading like a tech security. In 2014, in the early days, it wasn’t really mainstream and it did its own thing. Now it has become its own asset class, which I think is a positive thing.
The more institutionalized it is, it will take the volatility out of the market. As investors become more sophisticated, it becomes more common over time.
Many central banks are looking to develop a central bank digital currency, effectively a central bank-backed stablecoin. What do you think of these efforts?
I hope we see central bank digital currencies. It would be huge. The way we move money, at least in the US, is very efficient, but if you look at the pipes, it’s not a very good system. It has slowly built itself up; you have Swift and all these technologies and financial solutions when we can just redo the rails. If governments refer to it, I think that would be amazing.
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To contact the author of this story with comments or news, please email Jeremy Chan